The past year and a half has brought about significant changes in consumer behavior driven by factors such as inflation, economic uncertainty, and a shift towards experiences over goods. As the holiday season approaches, it's harder to tell what lies ahead. This article delves into the forces working for and against retailers, providing insights into the trends and challenges that will shape the upcoming holiday season.
The Good News
1. Inflation is Down
In 2022, holiday spending experienced a nearly 7% year-on-year inflation-driven increase. However, prices have come down this year across several categories, providing households with more disposable income. The U.S. Bureau of Labor Statistics reported that June's inflation rate hit a two-year low of 3%. This decrease has not only boosted consumer spending but also increased unit volume in certain segments. According to Morning Consult retail and e-commerce analyst Claire Tassin, consumer concern about inflation has also decreased significantly compared to the previous year.
2. Consumer Sentiment is Up
Consumer confidence, which had been relatively low, recently reached its highest level in two years, according to the Conference Board Consumer Confidence Index. The University of Michigan Survey of Consumers also reported its most favorable reading since October 2021. Strong employment numbers and increased real wages, surpassing inflation rates, have contributed to the positive sentiment. Analysts from Telsey Advisory Group attributed this optimistic outlook to the impact of White House infrastructure and manufacturing policies.
3. Consumers' Desire for Normalcy
Searches related to Labor Day, such as outdoor activities, patio furniture, electronics, home improvement, and beer, indicate a strong desire among consumers to return to normalcy. This sentiment extends to end-of-year shopping as well. Early indications of a robust holiday shopping season have already emerged, with mid-year interest in holiday deals being significantly higher than the previous year. Retailers who rely on a boost in sales during the holiday season can capitalize on this return to normalcy and re-engage with customers.
The Challenges Ahead
1. Consumers' Focus on Deals
While lower inflation benefits consumers by increasing their discretionary buying power, it poses challenges for retailers. Margins will face pressure on two fronts: retailers with surplus inventory will need to offer markdowns, and consumers' expectations for lower price tags will intensify. Shoppers have become increasingly savvy in navigating various channels and purchasing options while also dealing with inflation. Retailers must be aware of this trend and offer competitive pricing across all channels to attract customers.
2. Impact of Student Loan Forgiveness Ending
The record-high credit card debt carried by U.S. consumers, combined with the recent Supreme Court ruling striking down President Biden's student debt forgiveness program, presents a potential obstacle to household spending during the holidays. The end of student loan forgiveness will result in additional financial burdens for millions of households, particularly middle-income earners. This burden will likely impact spending on non-essential items, with certain retailers feeling the brunt of the consequences. Apparel retailers, in particular, are expected to face challenges due to the reduced purchasing power of their target demographic.
3. The Rise of the "Anti-Woke Mob"
Groups rallying against "wokeness" have disrupted retailers' attempts to celebrate the LGBTQ+ community, leading to a backlash and damage to brand reputation. The holiday season does not provide immunity from such incidents as controversy and division continues to be created. Retailers must carefully navigate these situations to avoid alienating their customer base. Handling these challenges with sensitivity and the big picture in mind is crucial to mitigating short-term financial damage.
As retailers prepare for the holiday season, they face a unique set of circumstances defined by changing consumer behavior, economic factors, and social dynamics. While lower inflation, increased consumer sentiment, and averted supply chain disruptions are solid reasons for optimism, challenges such as heightened price sensitivity and the end of student loan forgiveness require careful planning and strategic decision-making. By staying attuned to consumer expectations, offering competitive pricing, and responding thoughtfully to social issues, retailers should be able to navigate the holiday season successfully and capitalize on the upcoming opportunities for growth.